Fears About a China Housing Crash Overstated

Consensus among international media is that China’s economy is heading for an imminent and disastrous crash due to its inflated housing market. While there is absolutely no denying that housing prices in central parts of 1st Tier cities such as Beijing, Shanghai and Guangzhou are sky-high, this does not signal the end of China’s economic rise. If anything, the high price of housing in these cities affirms China’s rise from poor, cut-off backwater to the world’s second largest economy.

The New York Times weighs in with a Room for Debate feature on ‘China’s Scary Housing Bubble’. The debaters agree for the most part that even if growth slows, the slowdown in residential construction activity will not spell the end of China’s economy. Michael Pettis, professor at Peking University, offers a more likely scenario:

“The real risk for China, it seems to me, is not a property-led financial collapse. What is more likely is that at some point – and probably not this year or next – we begin a long process of adjustment in which economic growth slows dramatically as the economy grinds away at the overbuilding and at excess debt “

For now China is just trying to catch up to developed world standards and keep its economic engine running while the domestic economy evolves into something more service-oriented and consumer based. That will take time, and until then, construction of new buildings and infrastructure will continue.

Adam Nathaniel Mayer-Thanks for your message, Chinesecrash. I checked out your website and I happen to think that you might be a bit paranoid about the threat of a property bubble in China.

Let me first say that no one is trying to hide the fact that housing prices in many cities are way above the threshold of affordability for middle-class Chinese urban dwellers. There is no ‘PR’ conspiracy trying to cover this reality up. Even top leaders in the Chinese Central Government acknowledge this is a big problem and are enacting measures to curb real estate speculation.

That being said, stopping the construction of new housing units in China at this point in time would only exacerbate the problem of housing affordability by limiting supply. Not to mention, it would put a lot of people out of work, something the Chinese government is very concerned about because of the threat of social instability.

What I foresee happening (and is already happening to some extent) is a gradual shift away from housing development into other types of real estate such as commercial, retail and cultural buildings. We also see the Chinese economy at a macro level starting to evolve from one reliant on low-end manufacturing and infrastructure development to one focused more on high-end manufacturing, R&D and the service industry.

China has tremendous challenges ahead, but if the past 30 years is any indication, it is very unlikely that the country is headed for a devastating crash anytime soon.ReplyCancel

While I take your point, I would tend to disagree and go as far to say the residential property bubble will burst in China in the next 9-12 months.

Why?
– Chinese banks have now stopped lending to developers
– Developers are severely squeezed and cannot get credit and seeking it on international markets or forced to sell at low prices
– Oversupply of units will be dumped on market at low prices and will be glut forcing all prices downwards
– The govt has now done all it can to cool the property market
– Interest rates are rising and inflation rising

Charlie-Great post Adam, this is something I’ve been thinking about for a while. Can China manage this rate of growth or is building beyond demand compounding the already numerous concerns about property and equity?

Also sprach Analyst-I think there has been little doubt even among optimists that there are bubbles in some forms or another. The biggest threat right now, to me, is the fact that most people are still confident that the Chinese government is able to engineer a soft-landing and change its economic growth model away from investment. In the event that the Chinese government fails, that would surprise and shock many people.

My view is that people are over-estimating Chinese government’s ability in delivering necessary changes to the economy, falsely believing that the Chinese economy is really a command economy and government has great control over it. In short, that’s the “this time is different” syndrome. Also, most are focusing on the trend in the past decades of urbanisation that creates demand for real estate, while completely ignoring the negative impact of population ageing on real estate prices, which was really one of the driving forces for the 20-year bear market for Japanese real estate.

Whether the economy will crash disastrously, I know not. But I strongly believe that one should not be surprised by any slowdown, and one should be prepared for a crash-landing scenario as far as their investment strategies are concerned, instead of trying to argue that there are no problems with high real estate prices, etc. The reason that one should be prepared for that is that even if a crash-landing for Chinese economy is a low probability event, the impact will be very huge.ReplyCancel